BIS: Crypto’s ‘Inherent’ Flaws a Threat to Monetary System

There may be no room for crypto within banking or traditional financial services at all.

And in fact, the Bank of International Settlements said in a paper Monday (July 10) presented to the G20’s finance ministers representing a collection of the largest economies across the globe: Crypto has “inherent” flaws that are in fact a threat to the monetary system at large.

The BIS, for its part, is a financial institution that is in turn owned by central banks.

Central banks, of course, have been in varying stages of a concerted effort to develop central bank digital currencies (CBDC). As reported here, 93% of banks are working on those currencies.

“The survey suggests that there could be 15 retail and nine wholesale CBDCs publicly circulating in 2030,” BIS said, noting that work on retail CBDCs is further along than on wholesale coins.

And in the separate report citing several red flags in the crypto arena, titled “The Crypto Ecosystem: Key Elements and Risks,” the BIS stated “as growth is driven mainly by the speculative influx of new users hoping for high returns, crypto and DeFi pose substantial risks to (especially retail) investors. In sum, crypto’s inherent structural flaws make it unsuitable to play a constructive role in the monetary system.”

And any innovations that have come about as bitcoin and its brethren have taken root, those innovations have failed to be harnessed “for the benefit of society” and do not finance economic activity. Stablecoins, as mentioned elsewhere in the report “piggyback on the credibility of the central bank’s unit of account and may pose risks to monetary sovereignty.”

The report also notes that there is fragmentation in the industry, and fees tied to transactions remain high.

What Might Work: CBDCs

The innovations brought about by crypto, moreover, can be replicated within the traditional financial system, the BIS added. At least some of that innovation, the BIS said, could come through the use of CBDCs, and “improving the quality and reducing the costs of payments would be an important component of such a strategy. This could be achieved by introducing retail fast payment systems,” the report said.

The BIS’ findings come roughly a year after the BitPay/PYMNTS joint research that found that 32% of businesses have been expanding their use of crypto in hopes of attracting new customers. But we also found that a midteens percentage rate of consumers own crypto — indicating that there’s been relatively muted uptake of the digital offerings.

Beyond the CBDCs and the jousting against cryptos and stablecoins, FedNow will take center stage in just a few weeks and might conceivably shoulder aside stablecoins and crypto, which, as has been widely reported, has been under intensifying regulatory scrutiny.

There’s already a nod from the White House, too, that crypto has “failed to provide any real value other than bringing key user demands for the future of payments and digital money conveniently to the forefront,” PYMNTS reported — and so the clouds may be gathering, somewhat cryptically, for crypto.